Transformation of the Western Balkans Economy

While this process is incremental, new opportunities are already arising for accelerated digitalisation and streamlined financial transactions. By further integrating fragmented and small markets, the region can pool resources and knowledge, creating a strong impetus for growth.

Foreign direct investments (FDIs) accounted, on average, for 6% of GDP during the last decade, 70% of which came from EU Member States. Their contribution to the adoption of advanced technologies, productivity and job creation has been unquestionable. As an illustration, EU trade with the Western Balkans has grown by almost 130% from 2011 to 2021, while the region’s exports to the EU have increased by 207%. In addition to traditional sectors such as manufacturing, financial services, mining and real estate, which have largely attracted FDIs so far, there is strong potential in the ICT sector due to rapid growth and skilled workforce. Additionally, the renewable energy sector offers substantial opportunities as the region needs to accelerate its transition from coal to more sustainable energy sources.

The integration of the European market is the pivotal route to sustainability and competitiveness

In the midst of rapid technological advancements and a shifting geopolitical landscape, the region must intensify its efforts to keep attracting FDIs, which are on a declining trajectory. Some foreign companies have reached the end of their investment cycles and are now repatriating profits. Therefore, a deeper economic transformation based on EU standards and best international practices will be the right way forward for the regional market.

To achieve this, reforms focusing on stability, transparent regulations, and legal certainty should be complemented by initiatives focused on the green and digital transition, human capital and improved connectivity. Only by adopting a new growth model can the region ensure the sustainability and competitiveness of its economy in the longer term.

Preparing For the Introduction Of the CBAM

To start with, the shift to a low-carbon industry remains critical. The region is making progress in adopting adequate regulations and upgrading its energy infrastructure. Currently, renewable energy represents approximately 40% of the regional energy mix, compared to 48% in the European Union. Consistent policies in the areas of climate adaptation and mitigation are also a key incentive to enhance the intake of renewables and energy efficiency and tackle increasing air pollution and public health issues. The annual average concentration of fine particulate matter (PM2.5) in the region is 22.8 μg/m³, which is almost double the EU levels and four times higher than WHO recommendations (OECD). Fossil fuels, a major cause of global warming and pollution, still play a significant role in energy generation in the Western Balkans, accounting for 41% to 95% of the electricity mix. Therefore, efforts towards larger integration of renewables and diversification of energy supply should be accelerated further, though we can already see significant improvements.

To support the shift from fossil fuels to renewables, EIB Global signed €315 million in the last five years for new renewable energy projects (such as a wind farm in the Travnik region and one of the largest solar power plants in Pristina), the modernisation of energy infrastructure and improvement of energy security. We expect the launch of the Carbon Border Adjustment Mechanism (CBAM) to further accelerate the decarbonisation of local economies. Companies in the Western Balkans can greatly benefit from dedicated training and tools to decarbonise their businesses in order to continue exporting to the EU once CBAM comes into force on 1st January 2026.

Key facts

In this regard, we are implementing the Greening Financial Systems technical assistance program, which aims to help banks and companies understand climate risks, reduce their carbon footprint, and address these challenges through adequate strategies and mitigation projects. The initiative serves as a model for mobilising climate finance by tackling barriers that hold back engagement by commercial banks and SMEs in the green transition process.

In addition, improving the business environment by reducing barriers to investment is associated with higher ecoeconomic growth. Our analysis shows that SMEs in the region remain credit-constrained due to high interest rates, collateral requirements and complicated procedures. Financial institutions such as the European Investment Bank (EIB Global) can help improve access to finance for local medium and small enterprises by providing long-term financing on favourable terms. This is done through lower interest rates and longer tenors as are generally available on the market, as well as through guarantee products (through the European Investment Fund in particular) that contribute to lowering the collateral requirements and encourage partner banks to take more risks.

Better Connectivity For Faster Trade Flows

The expansion of transportation infrastructure, largely supported by the EU, has significantly improved trade flows and operational efficiency. Past improvements have increased real incomes by about 5%, with potential gains of up to 7% upon EU accession (World Bank). However, the region’s transportation infrastructure remains considerably less developed than that of the EU. Nevertheless, there is an upward trend, with average road infrastructure density increasing from 37 km in 2017 to 39 km in 2021 (OECD). The railway network accounts for approximately 45% of the EU’s total.

As one of the key financiers in the region’s transportation sector, we are actively engaged in EU flagship projects supporting connectivity, such as the upgrade of key railway and road sections in the Western Balkans along the Pan-European corridors, as well as the improvement of navigability and efficiency of waterway transport on the Danube-Rhine Corridor. Along with transport connectivity, investments in digital infrastructure and human capital can boost productivity and enable new technologies to be integrated into industrial and service processes.

Finally, massive brain drain, skills mismatch and lack of workforce continue to impede growth. According to estimations, close to 5 million people from the Western Balkans lived abroad in 2020 (out of 17 million population). To help provide upskilling and modern learning opportunities, EIB Global has invested €450 million for education and R&D projects across the Western Balkans, supporting educational and scientific facilities.

Market Reforms Towards Better Investment Climate

Going forward, timely implementation of the reform agendas under the Growth Plan will support a more conducive investment-friendly climate and help remove barriers that companies currently face, along with further industrial diversification, upskilling, and sustainable connectivity. As the EU bank, we will continue providing support for regional development, together with the European Commission and other international financial institutions (IFIs) within the Western Balkans Investment Framework. As an example of this approach, the Economic and Investment Plan is expected to mobilise €10.5 billion, including €3 billion in EU grants, for sustainable transport, energy, environment and climate, digital infrastructure, human capital, and private sector development.

With €11 billion invested in the region since 2010, we have contributed to improved infrastructure and private sector growth, as well as to the integration of EU standards into regional policies. By expediting the adoption of these standards, the flow of tangible benefits for people and businesses is accelerated. This means a cleaner environment and energy, smart transport solutions, and increased access to finance. We stand ready to further these efforts.